Pragmatic Centrism Is Crony Capitalism

Neoliberal crony capitalism is driven by a grand coalition between the pragmatic centre-left and the pragmatic centre-right. Crony capitalist policies are always justified as the pragmatic solution. The range of policy options is narrowed down to a pragmatic compromise that maximises the rent that can be extracted by special interests. Instead of the government providing essential services such as healthcare and law and order, we get oligopolistic private healthcare and privatised prisons. Instead of a vibrant and competitive private sector with free entry and exit of firms we get heavily regulated and licensed industries, too-big-to-fail banks and corporate bailouts.

There’s no better example of this dynamic than the replacement of the public option in Obamacare by a ‘private option’. As Glenn Greenwald argues, “whatever one’s views on Obamacare were and are: the bill’s mandate that everyone purchase the products of the private health insurance industry, unaccompanied by any public alternative, was a huge gift to that industry.” Public support is garnered by presenting the private option as the pragmatic choice, the compromise option, the only option. To middle class families who fear losing their healthcare protection due to unemployment, the choice is framed as either the private option or nothing.

In a recent paper (h/t Chris Dillow), Pablo Torija asks the question ‘Do Politicians Serve the One Percent?’ and concludes that they do. This is not a surprising result but what is more interesting is his research on the difference between leftwing and rightwing governments which he summarises as follows: “In 2009 center-right parties maximized the happiness of the 100th-98th richest percentile and center-left parties the 100th-95th richest percentile. The situation has evolved from the seventies when politicians represented, approximately, the median voter”.

Nothing illustrates the irrelevance of democratic politics in the neo-liberal era more than the sight of a supposedly free-market right-wing government attempting to reinvent Fannie Mae/Freddie Mac in Britain. On the other side of the pond, we have a supposedly left-wing government which funnels increasing amounts of taxpayer money to crony capitalists in the name of public-private partnerships. Politics today is just internecine warfare between the various segments of the rentier class. As Pete Townshend once said, “Meet the new boss, same as the old boss”.

The Core Strategy of Pragmatic Crony Capitalism: Increase The Scope and Reduce the Scale of Government

Most critics of neoliberalism on the left point to the dramatic reduction in the scale of government activities since the 80s – the privatisation of state-run enterprises, the increased dependence upon private contractors for delivering public services etc. Most right-wing critics lament the increasing regulatory burden faced by businesses and individuals and the preferential treatment and bailouts doled out to the politically well-connected. Neither the left nor the right is wrong. But both of them only see one side of what is the core strategy of neoliberal crony capitalism – increase the scope and reduce the scale of government intervention. Where the government was the sole operator, such as prisons and healthcare, “pragmatic” privatisation leaves us with a mix of heavily regulated oligopolies and risk-free private contracting relationships. On the other hand, where the private sector was allowed to operate without much oversight the “pragmatic” reform involves the subordination of free enterprise to a “sensible” regulatory regime and public-private partnerships to direct capital to social causes. In other words, expand the scope of government to permeate as many economic activities as possible and contract the scale of government within its core activities.

Some of the worst manifestations of crony capitalism can be traced to this perverse pragmatism. The increased scope and reduced scale are the main reasons for the cosy revolving door between incumbent crony capitalists and the government. The left predictably blames it all on the market, the right blames government corruption, while the revolving door of “pragmatic” politicians and crony capitalists rob us blind.

Radical Centrism: Increase The Scale and Reduce The Scope of Government

The essence of a radical centrist approach is government provision of essential goods and services and a minimal-intervention, free enterprise environment for everything else. In most countries, this requires both a dramatic increase in the scale of government activities within its core domain as well as a dramatic reduction in the scope of government activities outside it. In criticising the shambolic privatisation of National Rail in the United Kingdom, Christian Wolmar argued that: “once you have government involvement, you might as well have government ownership”. This is an understatement. The essence of radical centrism is: ‘once you have government involvement, you must have government ownership’. Moving from publicly run systems “towards” free-enterprise systems or vice versa is never a good idea. The road between the public sector and the private sector is the zone of crony capitalist public-private partnerships. We need a narrowly defined ‘pure public option’ rather than the pragmatic crony capitalist ‘private option’.

The idea of radical centrism is not just driven by vague ideas of social justice or increased competition. It is driven by ideas and concepts that lie at the heart of complex system resilience. All complex adaptive systems that successfully balance the need to maintain robustness while at the same time generating novelty and innovation utilise a similar approach.

Barbell Approach: Conservative Core, Aggressive Periphery

Radical centrism follows what Nassim Taleb has called the ‘barbell approach’. Taleb also provides us with an excellent example of such a policy in his book ‘Antifragile’, “hedge funds need to be unregulated and banks nationalized.” The idea here is that you bring the essential utility-like component of banking into the public domain and leave the rest alone. It is critical that the common man must not be compelled to use oligopolistic rent-fuelled services for his essential needs. In the modern world, the ability to hold money and transact is an essential service. It is also critical that there is only a public option, not a public imperative. The private sector must be allowed to compete against the public option.

A bimodal strategy of combining a conservative core with an aggressive periphery is common across complex adaptive systems in many different domains. It is true of the gene regulatory networks in our body which contains a conservative “kernel”. The same phenomenon has even been identified in technological systems such as the architecture of the Internet where a conservative kernel “represent(s) a stable basis on which diversity and complexity of higher-level processes can evolve”.

Stress, fragility and disorder in the periphery generates novelty and variation that enables the system to innovate and adapt to new environments. The stable core not only promotes robustness but paradoxically also promotes long-run innovation by by avoiding systemic collapse. Innovation is not opposed to robustness. In fact, the long-term ability of a system to innovate is dependent upon system robustness. But robustness does not imply stability, it simply means a stable core. The progressive agenda is consistent with creative destruction so long as we focus on a safety net, not a hammock.

Restore the ‘Invisible Foot’ of Competition

The neo-liberal era is often seen as the era of deregulation and market supremacy. But as many commentators have noticed, “”deregulation typically means reregulation under new rules that favor business interests.” As William Davies notes, “the guiding assumption of neoliberalism is not that markets work perfectly, but that private actors make better decisions than public ones”. And this is exactly what happened. Public sector employees were moved onto incentive-based contracts that relied on their “greed” and the invisible hand to elicit better outcomes. Public services were increasingly outsourced to private contractors who were theoretically incentivised to keep costs down and improve service delivery. Nationalised industries like telecom were replaced with heavily licensed private oligopolies. But there was a fatal flaw in these “reforms” which Allen Schick identifies as follows (emphasis mine):

one should not lose sight of the fact that these are not real markets and that they do not operate with real contracts. Rather, the contracts are between public entities—
the owner and the owned. The government has weak redress when its own organizations fail to perform, and it may be subject to as much capture in negotiating and enforcing its contracts as it was under pre-reform management. My own sense is that while some gain may come from mimicking markets, anything less than the real thing
denies government the full benefits of vigorous competition and economic redress.

One difference between the “real thing” and the neoliberal version of the real thing is what the economist Joseph Berliner has called the ‘invisible foot’ of capitalism. Incumbent firms rarely undertake disruptive innovation unless compelled to do so by the force of dynamic competition from new entrants. The critical factor in this competitive dynamic is not the temptation of higher profits but the fear of failure and obsolescence. To sustain long-run innovation in the economy , the invisible foot needs to be “applied vigorously to the backsides of enterprises that would otherwise have been quite content to go on producing the same products in the same ways, and at a reasonable profit, if they could only be protected from the intrusion of competition.”

The other critical difference is just how vulnerable the half-way house solutions of neo-liberalism were to being gamed and abused by opportunistic private actors. The neo-liberal era saw a rise in incentive-based contracts across the private and public sector but without the invisible foot of the threat of failure. The predictable result was not only a stagnant economy but an increase in rent extraction as private actors gamed the positive incentives on offer. As an NHS surgeon quipped with respect to the current NHS reform project: “I think there’s a model there, but it’s whether it can be delivered and won’t be corrupted. I can see a very idealistic model, but by God, it’s vulnerable to people ripping it off”.

Most people view the failure of the Soviet model as being due to the inefficiency of the planned economy. But the problem that consumed the attention of Soviet leaders since the 1950s was the inability of the Soviet economy to innovate. Brezhnev once quipped that Soviet enterprises shied away from innovation “as the devil shies away from incense”. In his work on the on-the-ground reality of the Soviet economy, Joseph Berliner analysed the efforts of Soviet planners to counter this problem of insufficient innovation. The Soviets tried a number of positive incentive schemes (e.g. innovation “bonuses”) that we commonly associate with capitalist economies. But what it could not replicate was the threat of firm failure. Managers safe in the knowledge that competitive innovation would not cause their firm or their jobs to vanish were content to focus on low-risk process innovation and cost-reduction rather than higher-risk, disruptive innovation. In fact, the presence of bonuses that rewarded efficiency further reduced exploratory innovation as exploratory innovation required managers to undertake actions that often reduced short-term efficiency.

Unwittingly, the neoliberal era has replicated the Soviet system. Incumbent firms have no fear of failure and can game the positive incentives on offer to extract rents while at the same time shying away from any real disruptive innovation. We are living in a world where rentier capitalists game the half-baked schemes of privatisation and fleece the taxpayer and the perverse dynamics of safety for the classes and instability for the masses leaves us in the Great Stagnation.

Bailouts For People, Not Firms

Radical centrism involves a strengthening of the safety net for individuals combined with a dramatic increase in the competitive pressures exerted on incumbent firms. Today, we bail out banks because a banking collapse threatens the integrity of the financial system. We bail out incumbent firms because firm failure leaves the unemployed without even catastrophic health insurance. The principle of radical centrism aims to build a firewall that protects the common man from the worst impact of economic disturbances while simultaneously increasing the threat of failure at firm level. The presence of the ‘public option’ and a robust safety net is precisely what empowers us to allow incumbent firms to fail.

The safety net that protects individuals ensures robustness while the presence of a credible ‘invisible foot’ at the level of the firm boosts innovation. Moreover, as Taleb notes programs that bail out people are much less susceptible to being gamed and abused than programs that bail out limited liability firms. As I noted in an earlier post, “even uncertain tail-risk protection provided to corporates will eventually be gamed. The critical difference between individuals and corporates in this regard is the ability of stockholders and creditors to spread their bets across corporate entities and ensure that failure of any one bet has only a limited impact on the individual investors’ finances. In an individual’s case, the risk of failure is by definition concentrated and the uncertain nature of the transfer will ensure that moral hazard implications are minimal.”

The irony of the current policy debate is that policy interventions that prop up banks, asset prices and incumbent firms are viewed as the pragmatic option and policy interventions focused on households are viewed as radical and therefore beyond the pale of discussion. Preventing rent-seeking is a problem that both the left and the right should be concerned with. But both the radical left and the radical right need to realise the misguided nature of many of their disagreements. A robust safety net is as important to maintaining an innovative free enterprise economy as the dismantling of entry barriers and free enterprise are to reducing inequality.

22 Responses to 'Radical Centrism: Uniting the Radical Left and the Radical Right'

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Ashwin,
You write, “Preventing rent-seeking is a problem that both the left and the right should be concerned with.”

I’m not sure the cronyist/technocratic dominant species is capable of moving away from its local fitness peak as a result of meta-awareness. More likely, gradual changes in the height of the peak — say, due to votes shifting to populist parties — should cause the species to adopt an “explore” strategy towards a nearby peak. So I think the question is, why haven’t challenges to the local peak emerged? Properties of the system itself are preventing this, and some of these properties are truly novel. For instance, the niche has never been as protected (in a democracy) given the cost of winning elections. Also, the technocratic state has achieved a great deal of “scale” in the sense that it is seen by households as a guarantor of their ‘stability’. It is possible that these novelties create more inertia to the landscape than we have seen in some time. As a result, the inevitable shift to a new peak (given the exhaustion of resources at the local peak) may be more abrupt — less enabled by gradual “exploration” strategies — than we would like.

Actually, as I re-read your title its clear that you refer to the “radical” left and right as change agents. So we probably agree that meta awareness not causing change in strategies by the center left/right.

Interesting! And I wasn’t surprised he quoted Taleb a couple of times. Seems similar to his approach as far as I can tell.

In a nutshell, he claims that the radical right an radical left could fing common ground if they agreed on two principles. The first is the need for a clearer distinction between public and private. The second is a bottom up approach (via the public sector) to stabilising the economy – i.e. no bailout of corporations, only of citizens.

The logic seems clear from a systemic point of view, but I do wonder, particularly with respect to the first principle, whether in reality it relies too heavily on a false dichotomy of public vs. private matters. Similar to the critique of methodological individualism, I miss the appreciation for the importance of higher order phenomena at all levels of society (private or public) that are worth conserving in the name of stabilising the system. Although I’m partial to the policy recommendations put forward, I personally find it much more plausible to think of society as a continuous hierarchy of formal and informal social phenomena instead of as a bipolar world of public vs. private.

Take the health care system, e.g. Even with a public option, or even in a single payer system, there is a large, even increasingly large, demarcation line between public and private spheres wihtin the supply chain of medical services. This can be modelled away but will never disappear in reality and will always be subject to abuse! The question is, how do you counter abuse?

An interesting speach in this respect by Katharina Pistor titled ‘False Dichotomies in Law and Finance’.

The essence is that stability can be better achieved if subordinate entities are given the rights and means by which to challenge the dominance of the higher order entities. She posits a bottom up approach to flexibilising contractual obligations instead of the current top down approach. The important difference to the above is that the whole system is thought of as a continuum, not a dichotomy.

T. Greer – You make some excellent points in your post. Response in a couple of days.

Oliver – the way I see your argument, you’re asking how abuse can be countered at the edge between public and private wherever that is. Again an excellent question and I’ll tackle that in my next post.

I was trying to make a more generic point, apparently not very convincingly.

Quick retry: There are more edges than that between private and public. Indeed there are endless boundaries between all types of entities, from the individual, over families, small companies all the way up to multinationals and the federal government. And for some countries, I’m not even sure government is on top of the list. The inherent problem lies in the hierarchy, i.e. that there are elephants, cats and mice in the same room. Thereby, it doesn’t matter whether the elephants are private or public entities.

One logical conclusion of your theory would be that the invisible foot turns all private elephants into manageable cats and mice. I very much doubt that.

To me, as for Ms. Pistor, the more important question is: how can the smaller entities be empowered so that they can stand up to the larger ones should these somehow encroach on their rights (property and other).

re: “As Glenn Greenwald argues, “whatever one’s views on Obamacare were and are: the bill’s mandate that everyone purchase the products of the private health insurance industry, unaccompanied by any public alternative, was a huge gift to that industry.”

Almost the whole US healthcare industry mess is due to crony capitalism in ways most don’t know about and that Obamacare made worse in many ways less obvious, for details on many of them,including some not seen elsewhere like how Medial Loss Ratios drive up costs, see this new page for details:

I’m what would probably be described as a left-wing populist, lived in Utah recently, and was surprised at how many supposed right wing Utahns were just as angry at the same things that I was.

The original Tea Party, the one started by Karl Denninger (market-ticker.org), was founded solely in outrage at the bailouts. When I first learned of this, I went to his site because I was sure he had to racist. He’s not. We all have so many preconceptions.

The process by which the Democratic Party co-opts and defuses genuine process by bringing it into the party where it is defused is brilliantly explained by Peter Camejo in his 2004 Avocado Declaration (polizeros.com/avocado-declaration) during his Green Party VP run with Nader. The same process happened to some of the Tea Party with the Republicans. Our two political parties really are Tweedledee and Tweedledum, which is a central point of your excellent post, I think.

To put the point made above differently: who should have the right — and who has the ability — to demand redress, and who determines failure? The government as a central actor is immensely problematic because it has way too much institutional power, while it is also (by design becoming increasingly) bad at representation (because of capture); in the ‘body’ approach, the environment determines the success of adaptations, but from the perspective of citizens this is exceedingly unhelpful. Right now, central governments and large private actors determine which companies survive, and which fail; end users do not, nor can they steer the development of services offered except as filtered through marketeers and politicians and parties. I like invisible feet, but in our world, markets do not determine (or care) whether companies deliver acceptable services. Who will guide the foot?

I cannot really put my finger on why your suggested solution frustrates me, but I think part of the reason why I am not convinced by the discussion is because it refers too much to actions taken by ‘the government’, which doesn’t exist, and because it assumes that managerial types within such a system are too invested in the status quo to respond to any other incentives. I don’t see why that would necessarily be the case. Although this may be the case, it seems to me that taking this stance is destructive, as it institutionalizes distrust of all actions taken by (quasi-)government-run institutions.

(PS. I apologize for any incoherencies or redundancies in my post. I agree completely that there is too much regulation of the wrong sort; I just don’t think political institutions are functional and resilient enough to fill the roles you hope to task them with, while all other mechanisms are just as prone to failure or misjudgment. Where to get, and how to guarantee, integrity?)

“Right now, central governments and large private actors determine which companies survive, and which fail; end users do not, nor can they steer the development of services offered except as filtered through marketeers and politicians and parties. I like invisible feet, but in our world, markets do not determine (or care) whether companies deliver acceptable services. Who will guide the foot?”

I believe the point Ashwin makes is that in truly competitive environments central governments and large private actors do not determine who survives. The invisible foot does – and the invisible foot is the same thing as “end users determining which services they get.”

In truly competitive systems this really does work. I give an example (and discuss the problem at greater length) in the following post:

The problem gets more complicated when it comes to central governments, for it is more difficult to make a ‘competitive system’ for them to operate in. Decentralization is probably the easiest way to do this, and as such, is a pretty natural part of the broader ‘radical centrist’ program.

and the truth of this is best seen by looking at the statistical spectrum of opinions offered by those pundits given access to the most visible media outlets. It is de facto forbidden to combine certain aspects of the American Left and Right. When have you ever heard anyone say “I am against mass immigration, against affirmative action and I also also for progressive taxation and universal healthcare.”

Never.

What an amazing statistical anomaly that is, given the thousands of opinions offered on the mass media.

The problem you describe so eloquently is not a new one. Thinkers on both sides of the spectrum such as Mancur Olsen and James Buchanan have been lamenting the rise of ‘distributional coalitions’ for decades. These groups, such as the financial industry- investment banks and PE firms most specifically- have been using their influence to unbalance the system to benefit themselves, at the expense of the general public, for 30+ years. In the policy arena, this is a perfect example of self-interest, wrongly understood.
To combat this negative influence, we need greater objectivity and increased pluralism. A unifying purpose beyond manipulation, embracing the core principles that generated the enormous progress and prosperity of the Modern Era.
Today’s elites and plutocrats are no different than those of any era, they seek power and ways to increase their influence at any cost.
What is needed is innovation in political ideas and process to match the innovation we’ve experienced in other fields such as technology and science. Otherwise, the imbalance of power and decision making will only grow.

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